Most businesses would be unable to continue trading if their premises, stock, critical machinery or computers were damaged in a disastrous event. Whilst many businesses are quick to arrange their property and contents insurance, business interruption insurance is often overlooked and seen as an extra unwanted expense.
However, business interruption insurance can mean the difference between survival and closure if you do actually experience disaster. This form of insurance covers you for the period of profits that you will miss out on as well as continued expenses, such as loans and leases, you will still need to pay within the time it takes to get you up and running again.
How does it work?
Business interruption insurance helps to financially protect companies in the event of a serious incident. Financial losses your business could sustain as a result of long-term interruption in your trading could mean you have to shut down.
This long-term interruption could be caused by a multitude of sources from cyberattacks, to natural disasters such as fire, flood or explosion.
There are a handful of underinsurance mistakes that you should be aware of and avoid as a business:
1. Cover for projected growth
If your business is growing quickly, you must be able to document and prove the monthly growth of income prior to the disaster. This will allow projections to be accurate as opposed to your claim being based on last year’s profits.
As a disastrous event, loss of utilities or other fixed costs are often excluded, so if your business relies heavily on utilities such as electricity, water, gas, or oil, then you may want to consider adding contingency business interruption insurance.
As you can imagine, although business may not immediately go back to running as normal you will still need to pay the standard utility bills and while the money isn’t coming in interruption insurance will help to cover these expenses.
3. Increased costs as part of the clean up
You may find that you experience ‘increased costs of working’ or increased costs in replacement of machinery as a result of whatever disaster your business has experienced.
In anticipation of these instances, you can add an extension to the policy to cover the costs incurred which are in excess of the normal costs of working. Such costs may also include rent on temporary premises, or additional wages for staff to assist in the clean-up. These increased costs are necessary to avoid a loss of turnover as a consequence of the damage.
4. Prevention of access
In some cases where you are unable to access the premises for some time, such as serious flooding incidents, you can experience further delays and loss of income. In order to be covered, you will need to have a ‘Prevention of Access’ extension on your business interruption insurance.
Calculating your business interruption insurance
Business interruption can be difficult to estimate. A standard estimate for the maximum indemnity period is 12 months, but between 12-24 months is much more realistic.
Calculating your business interruption insurance can be a difficult process, but the time taken to get it right will be well worth it should disaster strike. It is important to allow sufficient time to rebuild premises, replenish stock and resume serving your customer base. Not to mention considering the hard-to-replace skilled staff that you may lose due to the interruption.
The amount of cover your business needs will vary depending on your own unique requirements. Some businesses will be unable to continue trading for some time following a disastrous event if their equipment, stock and service can only run from that one location. Others may be able to pick up quickly working out of a different office or location and be less reliant on physical elements.
Seeking expert advice or enlisting an experienced broker is recommended to avoid underinsurance and potential business closure. Whilst business interruption insurance is an optional insurance, and level of cover is dependant on your exposure of risk, it should not be considered as unnecessary. It is well worth speaking to an expert even if just to calculate where you would be without it.
About the Author
Doug Kelley is the Director for Bluedrop Services, specialist insurance brokers with in-depth knowledge and expertise in business insurance. Bluedrop Services are specialist insurance brokers covering non-standard insurance. They offer additional support and expert advice in areas to reduce costs and downtime to your business and personal assets.